One of the most complex and fundamentalissues of accounting is the question of determining financial results. To solve it, such concepts as "economic" and "accounting" profit were divided. How do these concepts differ? Accounting profit is the profit calculated according to the current accounting rules. It is indicated in the profit and loss statements. It is the difference between the incomes recognized in the reporting period and expenses (expenses). Accounting profit is a financial result determined in the reporting period on the basis of accounting data on various business transactions and evaluation of all items of the balance sheet. There are different methods for calculating the profit indicators of the organization, but almost all of them are united by the application of the historical cost principle (cost price of acquisition) and the accrual method, when estimating all expenses.
Accounting profit is traditionally based on such concepts:
- preservation of capital or maintenance of well-being;
- Increase capital or efficiency.
Under the first concept, profit (financialresult) is the increase in equity received for a specific period of time. Profit is regarded as a result of improving the welfare of the organization. This concept is based on changes in liabilities (sources of capital) and assets (funds). In this case, the company's revenues are recognized only in the event of a reduction in liabilities or an increase in assets. Accounting profit is regarded as an increase in the company's own economic resources, and loss - as their decrease.
According to the second concept, the profit of an enterprise isthe difference between income and expenditure and the measure of performance. The accounting profit in this case is the result of the correct separation of the revenue received and incurred expenses for the reporting periods. In this approach, income and expenditure related to future periods are recognized as an asset or liability, regardless of whether it represents a real future outflow or inflow of economic resources. Under this system, the asset is treated as costs that translate into costs, and liabilities are incomes that later become values. In essence, such an approach is the basis for the concept of double entry used in accounting, through which a dual financial result is determined. It is interpreted, on the one hand, as an increase in equity (represents a statistical model of the balance sheet), and on the other hand, as the difference between income and expenditure (represents the financial model of the balance sheet).
Accounting profit as an indicator of the financial result has a number of shortcomings:
- there is no clear and unambiguous formulation of this concept;
- with different approaches to determining income and expenses, some of the profit indicators become incommensurable;
- The inflationary component often limits comparability of information on profit for several reporting periods.
The amount reported in accounting recordsprofit does not give a correct estimate of the increase or waste of capital for the reporting period, since the current economic costs of attracting certain types of resources are not fully reflected in this reporting.
Striving for reliable evaluation of effectivenessThe capital of the enterprise led to the use in modern practice of such an indicator as economic profit. This term is usually understood as an increase in the economic value of an organization. Economic profit is most often defined as the difference between the return on capital and its weighted average cost multiplied by the amount invested.
Economic and accounting profit differin that the second is superior to the former by the amount of unused opportunity costs. That is why economic profit is the main criterion for determining the effectiveness of the company's resources.